Changing Patterns XVIII

Transcription

1 Changing Patterns XVIII Mortgage Lending to Traditionally Underserved Borrowers & Neighborhoods in Boston, Greater Boston and Massachusetts, 2010 BY Jim Campen Professor Emeritus of Economics University of Massachusetts/Boston DECEMBER 2011 A REPORT PREPARED FOR M C B C MASSACHUSETTS COMMUNITY & BANKING COUNCIL P.O. BOX 6276 BOSTON, MA

2 ACKNOWLEDGEMENTS Preparation of this report was overseen by an advisory committee consisting of six members of the Mortgage Lending Committee of the Massachusetts Community & Banking Council (MCBC) Tom Callahan of the Massachusetts Affordable Housing Alliance, Donna Haynes of Central Bank, Bonnie Huedorfer, Mayte Rivera of the Massachusetts Division of Banks, Esther Schlorholtz of Boston Private Bank & Trust Company, and Kathy Schreck of the Massachusetts Mortgage Bankers Association plus Kathleen Tullberg, MCBC s manager. Rolf Goetze of the Boston Redevelopment Authority and Roy Williams of the Massachusetts State Data Center provided assistance with 2000 Census data. Stuart Ryan of Bank Maps LLC produced the map. Eileen Callahan of Eileen Callahan Design designed the report and prepared the PDF file for the online version of the report. In spite of helpful comments and suggestions received, the ideas and conclusions in this report are the responsibility of the author, and should not be attributed to officers or board members of the MCBC. This report is available online at: Copyright 2011, Massachusetts Community & Banking Council. All Rights Reserved.

3 FOREWORD The Massachusetts Community & Banking Council (MCBC) is pleased to offer Changing Patterns XVIII, its annual report on mortgage lending to traditionally underserved borrowers and neighborhoods in Boston, Greater Boston and Massachusetts. In addition to the data presented in this report, MCBC is also providing data on all Massachusetts cities and towns in a set of supplementary tables. MCBC hopes that this report and its supplementary data can help to increase access to fair credit for lower-income and minority homebuyers and homeowners by providing bankers, mortgage lenders, community representatives, regulators and others involved in the mortgage process with information on current mortgage lending patterns and the performance of major types of lenders. MCBC was established in 1990 to bring together community organizations and financial institutions to affect positive change in the availability of credit and financial services across Massachusetts by encouraging community investment in low- and moderate-income and minority neighborhoods; promoting fair and equitable access to financial products and services for minority group members; and providing research, other information, assistance and direction in understanding and addressing the credit and financial needs of low- and moderate-income individuals and neighborhoods. MCBC s Mortgage Lending Committee, which includes bank and mortgage company lenders, home buyer counseling and foreclosure prevention agency representatives, public officials and consumer and housing advocates, oversees preparation of this report. The Committee also works to identify other ways to expand homeownership opportunities for low- and moderate-income homebuyers and to sustain homeownership in low- and moderateincome neighborhoods. This report and its supplementary tables, as well as earlier reports in the Changing Patterns series, are available on MCBC s website at Other MCBC reports are also available at this website, together with further information on MCBC s committees and programs. MCBC depends on the financial support of its members to produce reports like Changing Patterns. MCBC thanks the following financial institutions for their 2011 membership: Abington Bank Fiduciary Trust Company Avon Co-operative Bank HarborOne Credit Union Bank of America Industrial Credit Union Blue Hills Bank Leader Bank, N. A. Boston Private Bank & Trust Company Mass Bay Credit Union Braintree Cooperative Bank Medical Area Federal Credit Union Cambridge Savings Bank North Cambridge Co-operative Bank Central Bank People s United Bank Chelsea Bank Sovereign Bank/Santander Citi State Street Corporation Citizens Bank of Massachusetts StonehamBank A Co-operative Bank Eagle Bank TD Bank East Cambridge Savings Bank The Bank of Canton Eastern Bank Winchester Co-operative Bank Everett Co-operative Bank MCBC s 2011 Community Partners include Chelsea Neighborhood Developers, Community Teamwork, Inc., DotWell, Dudley Square Main Streets, ESAC, the Fair Housing Center of Greater Boston, Interise, the Massachusetts Affordable Housing Alliance, the Massachusetts Association of CDCs, the Metropolitan Boston Housing Partnership and the Somerville Community Corporation.

4 CONTENTS Executive Summary...i Introduction...1 I. Understanding Government-Backed Lending...4 II. The Overall Level and Composition of Mortgage Lending...6 III. Lending by Borrower Race/Ethnicity and Income...8 IV. Lending by Neighborhood Race/Ethnicity and Income...11 V. Denials of Mortgage Loan Applications...13 VI. Lending by Major Type of Lender...16 VII. The Biggest Lenders...17 VIII. Recent Legislative and Regulatory Developments...19 Map of Greater Boston Tables 1 3: The Overall Level and Composition of Mortgage Lending Tables 4 13: Lending by Borrower Race/Ethnicity and Income Tables 14 17: Lending by Neighborhood Race/Ethnicity and Income Tables 18 19: Denials of Mortgage Loan Applications Tables 20 24: Lending by Major Type of Lender Tables 25 29: The Biggest Lenders Appendix Tables 1 8 Notes on Data and Methods...N-1 Note: A set of Supplemental Tables provides much additional information on (1) lending in all cities and towns in Massachusetts and (2) lending in the state s fourteen counties. These tables are available in the Reports section of the MCBC website:

5 EXECUTIVE SUMMARY This is the eighteenth in the annual series of Changing Patterns reports prepared for the Massachusetts Community & Banking Council (MCBC) by the present author. The series is aptly named: mortgage lending since 1990 has indeed been characterized by changing patterns. A decade ago, the major focus of the series shifted from concern for fair access to credit for traditionally underserved borrowers and neighborhoods to concern for access to fair credit for these same borrowers and neighborhoods. This reflected the extent to which the problem of redlining had become overshadowed by the problem of reverse redlining, whereby areas that previously had difficulty getting any mortgage loans at all became specifically targeted for higher-cost mortgage loans. This year s report, which offers information on patterns of mortgage lending during 2010, shows the continuation of another major shift in lending patterns. In the wake of the implosion of the subprime mortgage industry, high-cost subprime lending has almost disappeared, while governmentbacked lending (mostly consisting of loans insured by the Federal Housing Administration [FHA]) has grown dramatically. This government-backed lending has gone disproportionately to the same traditionallyunderserved borrowers and neighborhoods that were targeted by predatory subprime lenders, but it represents a very different phenomenon. i Government-backed loans (GBLs), while somewhat more expensive than conventional prime loans, are generally responsible and sustainable. They are not a problem in themselves, but are a symptom of and a constructive response to a deeper problem: the limited availability of conventional prime loans to lower-income and minority borrowers and neighborhoods. With the fading of predatory subprime lending, the emergence of the current housing market ills, and the persistence of the foreclosure epidemic, the original problem that led to the inception of this series of reports in the mid- 1990s has again assumed center stage: the problem of fair access to prime loans for traditionally underserved borrowers and neighborhoods. The report presents information for the city of Boston, for Greater Boston, and for Massachusetts, as well as for each of the state s thirty-three largest cities and towns. The primary data source is federal Home Mortgage Disclosure Act (HMDA) data for 2010, supplemented by data on population and income from the U.S. Census Bureau and annual data on metropolitan area income levels from the Department of Housing and Urban Development. The report is restricted to first-lien loans for owneroccupied homes. This Executive Summary highlights some of the most interesting findings presented in the following pages. A more inclusive summary is provided by the bold-faced portions of the bullet points in the body of the report, and by the charts and tables that are interspersed with the text. Readers interested in additional detail will want to investigate the tables that follow the body of the report. ii Government-backed loans (GBLs) continued to account for historically high shares of total lending in Statewide, GBLs accounted for nearly one-third (32%) of all home-purchase lending and for one-twelfth (8%) of the much larger volume of refinance lending. These GBL loans shares are slightly lower than in 2009, but far above those in 2005, when GBLs accounted for just 2% of home-purchase loans and 0.6% of refinance loans statewide. High-APR loans (HALs) almost disappeared in 2010, accounting for just 0.5% of all loans (homepurchase and refinance combined) statewide down from 1.7% of all loans in 2009, and far below their peak level of 22% in Over four years, i Section I provides background information on the nature of government-backed lending, the reasons for its dramatic recent increase, and its somewhat checkered history. ii A set of supplemental tables, available at provides information on lending in all of the state s 351 cities and towns and in each of its fourteen counties. i

6 the number of HALs fell from 3,361 to 42 in Boston, from 14,849 to 332 in Greater Boston, and from 40,143 to 1,066 statewide. Government-backed loans accounted for a substantially smaller percentage of loans in Massachusetts than they did nationwide. In Massachusetts, the GBL loan shares in 2010 were 32% for home-purchase loans, 5% for refinance loans, and 14% overall. Nationwide, GBL loans shares were 53% for home-purchase loans, 14% for refinance loans, and 27% overall. Among the state s thirty-three biggest cities, GBL loan shares were highest in Lawrence (where they accounted for 79% of all home-purchase loans and 31% of all refinance loans), Brockton (73% and 25%) and Springfield (67% and 25%). GBLs also made up more than half of all homepurchase loans in eight other cities (Lynn, Revere, Fall River, New Bedford, Methuen, Taunton, Attleboro, and Worcester). Black borrowers in Boston, Greater Boston, and statewide received shares of total conventional (i.e., not government-backed) loans in 2010 that were far below their shares of total households. In Boston, for example, blacks made up 21% of households but received only 5% of conventional home-purchase loans and 3% of conventional refinance loans. Statewide, the Latinos made up 7% of households but received only 3% of conventional home-purchase loans and just 1% of conventional refinance loans. Black and Latino borrowers in Boston, in Greater Boston, and statewide were much more likely to receive GBLs than were their white or Asian counterparts. For home-purchase loans in Greater Boston, for example, the GBL loan shares in 2010 were 54% for blacks and 55% for Latinos, but only 24% for whites. For refinance loans, the GBL loan shares were 22% for blacks, 17% for Latinos, and 6% for whites. GBL loan shares were consistently much lower for Asian borrowers than for whites. When borrowers in Boston, Greater Boston, and Massachusetts are grouped into five income categories, GBL shares of both home-purchase and refinance loans in 2010 tended to decline steadily as the level of borrower income increased. For home-purchase lending in Greater Boston, for example, GBL loan shares fell steadily from 36% for moderate-income borrowers to just 6% for the highest-income borrowers. (However, GBL loan shares for low-income borrowers tended to be lower than those for the next two income categories.) When borrowers are grouped by both race/ethnicity and income level, the GBL loan shares for blacks and Latinos are usually substantially higher than the GBL shares for white borrowers in the same income category. For example, in the City of Boston, the GBL loan shares for homebuyers with incomes between $72,000 and $107,000 were 62% for blacks, 69% for Latinos, and 23% for whites. For home-purchase loans in the city of Boston in 2010, the government-backed loan (GBL) share in low-income census tracts was more than four times greater than that in upper-income tracts (24% vs. 5%) and the GBL loan share in predominantly minority census tracts was almost three times greater than that in predominantly white tracts (46% vs. 16%). The pattern for refinance loans was very similar. Government-backed lending varied dramatically among Boston s major neighborhoods. For home-purchase loans, GBL shares ranged from 64% in Mattapan and 56% in East Boston to 3% in Back Bay/Beacon Hill. For refinance loans, GBLs accounted for 26% of the total loans in Mattapan but for only 1% of all loans in the South End. Total home-purchase lending to blacks and Latinos was highly concentrated in a small number of the state s cities and towns, and entirely absent in many others. Just four cities (Boston, Brockton, Springfield, and Worcester) accounted for over one-half of total loans to blacks in Massachusetts, but for only 11% of the state s total loans to whites. Eight communities (Lawrence, Boston, Springfield, Lynn, Revere, Worcester, Chelsea, and Methuen) accounted for over onehalf of all lending to Latinos in the state, but for ii

7 just 12% of total lending to whites. Meanwhile, in 123 communities over one-third of the state s 351 cities and towns there was not a single loan to either a black or a Latino homebuyer. In Boston, Greater Boston, and Massachusetts in 2010, the denial rates on conventional (i.e., nongovernment-backed) mortgage loan applications by blacks both for home-purchase loans and for refinance loans were in every case more than twice as high as the corresponding denial rates for whites, while denial rates for Latinos were more than one and one-half times as high as the white denial rates. Black/white and Latino/white denial rate disparity ratios were significantly lower for applications for government-backed loans. Lenders (mainly independent mortgage companies). Statewide, Massachusetts banks and credit unions accounted for 44% of all loans but only 21% of GBLs; Licensed Mortgage Lenders, while accounting for 33% of all loans, made 48% of GBLs. Other Lenders (mainly out-of-state banks) accounted for 23% of total lending and 31% of GBLs. Massachusetts banks and credit unions ( CRAcovered lenders ) directed a substantially greater share of their total loans as conventional loans and a substantially smaller share of their total loans as GBLs to every one of the categories of traditionally underserved borrowers and neighborhoods examined in this report than did Licensed Mortgage Lenders and Other Lenders. Even though black and Latino applicants had, on average, substantially lower incomes than their white counterparts, the higher denial rates experienced by blacks and Latinos cannot be explained by their lower incomes. When applicants in Boston, in Greater Boston, and statewide are grouped into income categories, the 2010 denial rates for blacks and for Latinos were in almost every case well above the denial rates for white applicants in the same income category, and there is no tendency for the denial rate disparity ratio to fall as income rises. Statewide, for example, black applicants with incomes over $150,000 experienced a denial rate of 14%, twice as high as the 7% denial rate experienced by their white counterparts; the 12% denial rate for Latinos in this income category was 1.8 times the white rate. Following four years of substantial increases, the home-purchase loan share of Massachusetts banks and credit unions fell slightly in 2010, to 46% in Boston (down from 48% the year before but still more than double the low point of 20% in 2005) and to 44% statewide (down from 45% the year before but far above their 24% loan share in 2005). Massachusetts banks and credit unions accounted for a substantially larger share of total loans than of government-backed loans (GBLs), while the reverse was true for Licensed Mortgage Both in Boston and statewide in 2010, Bank of America was by far the biggest lender, with Wells Fargo ranking second and Mortgage Master in the third position. The next three places were taken by RBS Citizens (which ranked fourth in Boston and fifth statewide), Leader Bank/Mortgage (fifth in Boston, sixth statewide) and Sovereign ranked (sixth in Boston, fourth statewide). A sweeping set of changes in the laws and regulations governing the origination of mortgage loans has been adopted in recent years, designed to prevent a recurrence of predatory lending. Substantive changes include a nationwide system of licensing and registration; limits on compensation systems for loan originators; safeguards to the integrity of the appraisal system; improvements in the timeliness, clarity, and substance of disclosures to borrowers; minimum underwriting standards, including required verification of borrowers ability to repay their loans; and prohibitions on certain predatory loan features. Structural changes to the regulatory system itself include establishment of a new agency (the Consumer Financial Protection Bureau) that has consumer protection as its primary mission and consolidated authority over all mortgage lending; new units dedicated to enforcement of fair lending laws; and increases in the ability of states to protect their citizens from predatory lenders. iii

8 INTRODUCTION This report is the eighteenth in an annual series of studies that was initiated by Changing Patterns: Mortgage Lending in Boston, The report includes detailed information on 2010 lending in Boston, Greater Boston, and Massachusetts, as well as in the state s thirty-three largest cities and towns. In addition, a separate set of supplemental tables provides selected data for every city and town in Massachusetts and for the state s fourteen counties. 1 The series is aptly named: mortgage lending since 1990 has indeed been characterized by changing patterns. In the early 1990s, Massachusetts banks, responding to community and regulatory pressures to fulfill their obligations under the state and/or federal Community Reinvestment Act (CRA), greatly increased their lending to the lower-income and minority borrowers and neighborhoods that had previously been underserved. In the following years, however, these banks lost most of their total market share to other lenders whose local lending was not covered by the CRA. In the middle 1990s, subprime lending began its explosive growth. Although subprime loans initially consisted overwhelmingly of loans to refinance existing mortgages, by 2003 they had become a larger share of home-purchase loans than of refinance loans. Subprime lending peaked in 2005 and 2006, and then began a precipitous drop that has resulted in its almost complete disappearance. Most recently, government-backed lending has captured an unprecedentedly large share of the overall market, particularly of home-purchase lending. Against this backdrop of dramatic changes, however, lending patterns in 2010 were very similar to those in the previous year. The basic goal that motivated the Massachusetts Community & Banking Council (MCBC) to initiate the Changing Patterns series of reports was to increase access to home-purchase mortgage loans and, thus, access to homeownership for traditionally underserved borrowers and neighborhoods. In the early 1990s, mortgages themselves were a relatively standard product, which potential home-buyers either got or didn t get. With the growth of subprime lending, however, a very different concern became increasingly important: the proliferation of higher-cost mortgage loans to the same borrowers and in the same neighborhoods that had traditionally been underserved. In short, concern shifted to include not only fair access to credit but also access to fair credit. 2 Expressed differently, the problem of redlining became overshadowed by concern with reverse redlining, whereby areas that previously had difficulty getting any mortgage loans at all became specifically targeted for higher-cost mortgage loans. Predatory lenders pushed loans characterized by egregiously high interest rates and fees, unconscionable features, and/or highly deceptive sales practices on minority borrowers and neighborhoods. As a result, these same borrowers and neighborhoods have been disproportionately impacted by the current tidal wave of foreclosures. 3 Following the meltdown of the subprime mortgage lending industry, concerns over fairness in mortgage lending have returned to problems of access to prime mortgage loans by traditionally underserved borrowers and neighborhoods. The dramatic increase in the market share of government-backed loans (GBLs) that is, loans insured by the Federal 1 These supplemental tables are available at: 2 This shift is discussed in From Fair Access to Credit to Access to Fair Credit, Chapter 5 of Dan Immergluck, Credit to the Community: Community Reinvestment and Fair Lending Policy in the United States (M.E. Sharpe, 2004). 3 For a comprehensive, up-to-date study quantifying the ways that foreclosure patterns are strongly linked with patterns of risky lending, see Debbie Bocian et. al., Lost Ground, 2011: Disparities in Mortgage Lending and Foreclosures (Center for Responsible Lending, November 2011, available at: The Mortgage Bankers Association reported that the percentage of loans in the foreclosure process nationwide at the end of the third quarter of 2009 was 15.4% for subprime loans, compared to 3.2% for prime loans (Press release of Nov. 19, 2009, available at: Closer to home, the City of Boston s Department of Neighborhood Development found that the Boston neighborhoods where the rate of foreclosure petitions were highest in 2007 were the neighborhoods where the rate of higher-cost lending was found to be highest in previous Changing Patterns reports, ( Foreclosure Trends 2007, pp. 2 and 8; available at:

9 Housing Administration (FHA) or guaranteed by the Veterans Administration (VA) or the Department of Agriculture (USDA) is an indication of reduced availability of prime mortgage loans. While government-backed lending is generally done in a responsible way, GBLs are typically more costly than prime loans and represent a second-best option that borrowers turn to only when they cannot obtain prime mortgage loans. Because the governmentbacked lending programs had low lending volumes in Massachusetts until very recently, many readers of this report will be unfamiliar with them. Accordingly, Section I of this report provides a brief guide to understanding government-backed lending. The main data source for this report is the Home Mortgage Disclosure Act (HMDA) data released annually by the Federal Financial Institutions Examination Council. HMDA data include information from almost all lenders who make substantial numbers of mortgage loans. For each loan application received, the data include the income, race, ethnicity, and sex of the applicant; the location of the property; whether the loan is for home-purchase, refinance, or home improvement; whether or not the loan is a government-backed loan; whether the loan is secured by a first lien or a junior lien on the property; and whether or not the loan is for an owner-occupied home. The data also indicate whether or not the loan is a higher-cost loan as determined by its annual percentage rate, or APR. The primary focus of many of this report s tables and charts is to provide information on GBLs as a share of all loans made to different categories of borrowers and in different geographical areas. To this end, the report draws on two major sources of data in addition to HMDA data. First, the estimates of the 2010 median family income (MFI) in each metropolitan area produced by the U.S. Department of Housing and Urban Development (HUD) are used to place borrowers into income categories. Second, information from the 2000 U.S. Census is utilized so that analysis of GBL lending patterns in terms of the income level and race of the borrowers who receive the loans can be supplemented by analysis of patterns in terms of the income level and percentage of minority households in the geographic areas where the loans were made. The Notes on Data and Methods at the end of the report provide details on the definitions and sources of the data used. The analysis in this report is limited to first-lien home-purchase and refinance loans for owneroccupied homes. That is, it excludes (1) second mortgages and other junior-lien loans, (2) loans for homes that borrowers will not be occupying as a principal residence, and (3) home-improvement loans. Appendix Table 1 provides detailed data on the numbers and percentages of different types of loans in Massachusetts. It shows that first-lien loans for owner-occupied homes accounted for 91.1% of all loans in the state, that first-lien loans for non-owneroccupied homes accounted for 7.3% of the total, and that junior-lien loans accounted for the remaining 1.6% (the corresponding percentages in 2009 were 91.7%, 6.1%, and 2.2%, respectively.) Appendix Table 2 provides information on all loans and GBLs, broken down by purpose (home-purchase and refinance), by type of lien, and by borrower race/ethnicity. The principal goal of this report, like its predecessors, is to contribute to improving the performance of mortgage lenders in meeting the needs of traditionally underserved borrowers and neighborhoods by presenting a careful description of what has happened that all interested parties community groups, consumer advocates, banks and other lenders, regulators, and policy-makers can agree is fair and accurate. This series of reports offers neither explanations of why the observed trends have occurred nor evaluations of how well individual lenders have performed. Rather, its descriptive contributions are intended to be important annual inputs into the complex, ongoing tasks of explanation and evaluation. For many readers, this report s main contribution will consist of the wealth of information contained in its thirty-six pages of tables, especially data about 2

10 individual municipalities of particular interest. 4 No attempt is made to summarize all of this information in the pages that follow. For those seeking an overview, however, the following pages of text, charts, and simple tables attempt to highlight some of the most significant findings that emerge from an analysis of the data for Boston, Greater Boston, and Massachusetts, with limited attention to other areas. (In this report, Greater Boston is defined as consisting of the 101 cities and towns in the Metropolitan Area Planning Council [MAPC] region. 5 ) The remaining sections of the report are organized as follows: Part I provides background information on government-backed lending. Part II presents information on the overall level and composition of mortgage lending. Part III analyzes patterns of lending to borrowers grouped by race/ethnicity and by income level. Part IV examines patterns of lending in neighborhoods. The analysis looks at census tracts grouped by income level and by percentage of minority households, as well as at Boston s major neighborhoods. Part V summarizes data on denial rates, highlighting racial/ethnic disparities. Part VI focuses on the relative importance and differential patterns of lending by three major types of mortgage lenders. Part VII presents information on the biggest lenders both overall and for government-backed loans both in Boston and statewide. Part VIII offers an account of the substantial recent changes in the laws and regulations that govern mortgage lending. Finally, a section of Notes on Data and Methods provides considerable detail on a number of technical matters. 4 Additional tables, available at provide information on mortgage lending in all of the cities and towns in Massachusetts and in all fourteen of the state s counties. It should be noted that these supplemental tables do not provide individual data for all 351 of the state s cities and towns; this is because census tracts are the smallest geographic units for which HMDA data are reported, and 68 towns in Massachusetts are too small to have even one census tract of their own. In these cases, information is reported for the set of towns that share a single tract (for example, Truro and Wellfleet in Barnstable County). 5 More information on the MAPC region and on the MAPC itself a regional planning agency established by the state in 1963 is available at Another widely used definition of Greater Boston is the Boston Metropolitan Statistical Area (MSA), the Massachusetts portion of which is currently defined by the federal government to include the 147 communities in Essex, Middlesex, Norfolk, Plymouth, and Suffolk counties. A map of the MAPC region and the Boston MSA precedes Table 1. 3

11 I. UNDERSTANDING GOVERNMENT-BACKED LENDING This report presents a great deal of information on the increased volume of government-backed lending and on the disproportionate shares of this lending that went to traditionally underserved borrowers and neighborhoods. To be able to assess the significance and implications of this development, it is necessary to understand the nature of government-backed mortgage lending and the context within which it has increased so dramatically. Overview The take-away lesson from this section is that government-backed loans (GBLs) are very different from subprime loans. Subprime lenders had a financial incentive to steer borrowers into subprime loans, because these loans generally resulted in substantially higher fees than did prime loans. Subprime loans were marketed aggressively and deceptively to make them appear much less expensive than they actually were, with lenders particularly targeting black and Latino borrowers and neighborhoods. From the borrower s point of view, many (if not most) of those who received subprime loans would have been better off receiving no loan at all. An extraordinarily high proportion of subprime loans have resulted in delinquencies and foreclosures; as of November 2010 (the most recent date for which these data are available), only 45.2% of outstanding subprime loans in Massachusetts were current in their payments, 23.9% were 90 or more days delinquent, and 13.4% were in the process of foreclosure. 6 In contrast, GBLs are somewhat less profitable for lenders, and more expensive for borrowers, than prime conventional loans, but they offer a reasonable option for both parties when borrowers are unable to obtain a prime loan. Their recent growth, especially to traditionally underserved borrowers and neighborhoods, is not itself a problem, but is rather a symptom of and a constructive response to an underlying problem: the lack of availability of prime conventional loans to those borrowers and neighborhoods. Although GBLs require smaller down payments and allow lower credit scores than prime loans, they have proven to be almost as affordable and sustainable. As of June 2011, 88.1% of outstanding GBLs in Massachusetts were current in their payments (compared to 91.9% for prime loans), 3.8% were 90 or more days delinquent (compared to 2.6% for prime loans), and 1.9% were in foreclosure (the same percentage as for prime loans). 7 The Nature of Government-Backed Lending Three different agencies of the federal government back home mortgage loans issued by private lenders. The Department of Housing and Urban Development s Federal Housing Administration (FHA) insures mortgages, while the Veterans Administration (VA) and the Department of Agriculture (USDA) guarantee them. 8 The FHA accounts for the vast majority of GBLs (90.5% of the total in Massachusetts in 2010) with the VA accounting for most of the rest (8.1% of the statewide total). Although there are differences among the three programs, they are similar enough that the description that follows will focus on FHA lending only. 9 FHA loans are made by private lenders who have been certified by the agency and whose performance is subject to FHA review. The lender sets the price and terms of the loan, and decides whether or not to approve the applications that it receives. Insurance for 6 Loan status statistics in this paragraph and the next are from a very useful website maintained by the Federal Reserve Bank of New York: The data cited in the text were current when the website was accessed in late November See previous footnote. The New York Fed s data are for FHA+VA loans rather than for all GBLs. 8 This report follows the common practice of using the term government-backed lending to include only the lending backed by these three federal agencies. The term does not include lending backed by state housing finance agencies (such as MassHousing). Nor does it include lending guaranteed by Fannie Mae and Freddie Mac; these two government-sponsored enterprises were private corporations between 1970 and 2008, when they failed and were placed into federal government conservatorships. 9 Among the most important differences are that VA and USDA require no monthly insurance premium (they require an upfront guarantee fee [for the VA this is equal to 2.15% of the loan amount if the down payment is less than 5%, waived in the case of disabled borrowers] and they require no down payment). VA loans are available only to veterans of the military services, while USDA loans are available only in rural areas (broadly defined) and only to borrowers who are income-qualified. 4

12 the loans is provided by a self-supporting Mutual Mortgage Insurance Fund, financed by premiums paid by FHA borrowers; there is both an initial upfront premium and an annual premium that is allocated to the borrowers monthly payments. Borrowers must be owner-occupants and must make a down payment of at least 3.5% of the value of the property, although the down payment need not come from their own funds. (For example, the FHA allowed the $8,000 tax credit that was available to first-time home buyers during the early months of 2010 to be applied to the down payment.) Loan amounts must be below a maximum that depends on the level of housing prices in the county within which the property is located and whether the property has one, two, three, or four units. During all of 2010, the maximum for a singleunit property in the Greater Boston area was $523,750. (The lowest maximum in the state was $271,050 in Berkshire County; the highest was $729,750 on Martha s Vineyard and Nantucket.) 10 In response to losses in recent years that have depleted the reserves in its insurance fund, the FHA has tightened its minimum lending standards, increased annual insurance premiums on new loans, and increased scrutiny of lender performance. 11 As of October 2011, the one-time upfront insurance premium is 1% of the loan amount and the annual insurance premium is 1.10% if the loan-to-value ratio (LTV) is 95% or less (that is, if the down payment is 5% or more), and 1.15% if the LTV is above 95%. The minimum down payment of 3.5% applies only for borrowers with credit scores of at least 580; borrowers with credit scores between 500 and 579 must make a down payment of at least 10%; and loans to borrowers with credit scores below 500 are not eligible for FHA insurance. Most lenders require higher credit scores than the minimums established by the FHA; the average credit score on newly-insured loans in 2010 was almost 700, up from 634 in Reasons for the Surge in Government-Backed Lending In the 1990s government-backed lending primarily served borrowers who could not obtain a prime conventional loan, but could meet the looser underwriting standards and/or lower down payment requirements of government-backed loans. The FHA/VA share of the nationwide mortgage market was fairly constant between 1990 to 2000, at about 12%, but was considerably lower in Greater Boston and other areas where relatively high home prices resulted in most loan amounts exceeding the FHA maximum. Data in previous Changing Patterns reports indicate that GBLs accounted for an average of 7.1% of applications for home-purchase loans in Boston between 1993 and 2000 (fluctuating in the range from 5.5% to 9.5%). The GBL market share plunged with the growth of subprime lenders, who offered potential GBL borrowers loan products that required less documentation and paperwork, allowed higher loan amounts, required no down payments, and promised relatively low initial monthly payments. Nationwide, the FHA/VA share of the mortgage market steadily declined from 11.0% in 2000 to a low of 2.7% in The surge of GBLs in the last three years has resulted from at least three developments: the void created by the collapse of the subprime lenders who had taken away much of the traditional GBL market; very large increases in the maximum loan amounts allowed for FHA loans; and, most importantly, a dramatic decrease in the availability of conventional mortgage loans for all but those with high credit scores and the ability to make significant down payments. Portfolio 10 These loan limits remained in place through September Currently the maximums for a single-unit property are $465,750 in Greater Boston, $271,050 in Berkshire Country, and $625,500 on Martha s Vineyard and Nantucket. 11 Although FHA insurance compensates lenders for loan losses, the lenders still have incentives to avoid making loans that will not be repaid: they incur costs during the period of delinquency, they incur the risk that they will have to buy back loans that go bad, and they face the possibility of sanctions from the FHA, including the loss of eligibility to offer FHA loans. The head of the FHA told Congress in the fall of 2010 that during the previous year the FHA had withdrawn approval from more than 1,500 lenders, and suspended others (testimony of David H. Stevens to the House Financial Services Committee, September 22, 2010, pp. 1 and 5; available at: 12 HUD s Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund is an excellent source of information on how the FHA lending program works and on recent changes to the program. The reports for Fiscal Year 2010 (November 2010) and Fiscal Year 2011 (November 2011) are both available at: During the first three quarters of 2010, the upfront insurance premium was higher than it is now (1.75%) and the annual premiums were lower (0.50% or 0.55%). 13 Nationwide FHA/VA shares were calculated from annual data in The 2010 Mortgage Market Statistical Annual, Volume 1, Inside Mortgage Finance, p. 4 (not available online). 5

13 lending and the secondary market for private securitization almost completely disappeared, limiting conventional lending almost entirely to loans that could be sold to Fannie Mae or Freddie Mac. Stricter underwriting criteria required by Fannie and Freddie, together with the greatly increased cost and decreased availability of the private mortgage insurance that Fannie and Freddie require for loans with down payments of less than 20%, made conventional loans unobtainable for many borrowers, and more expensive than government-backed lending for many others. 14 Past Problems Although the nature of current FHA lending merits the positive assessment offered here, the program has a checkered history that has brought it much welldeserved criticism over the years. From its inception in the 1930s until the mid-1960s, the FHA explicitly embraced both redlining and discrimination against black and other minority borrowers. FHA lenders subsequently pioneered reverse redlining and championed block-busting practices that devastated many inner-city neighborhoods; the B-BURG program that transformed Mattapan in the late 1960s is a local example of the damage wrought by FHA lending. In fact, it was outrage at the destructive impacts of FHA lending that was responsible for much of the organizing and advocacy that resulted in enactment of the Home Mortgage Disclosure Act in 1975 and the Community Reinvestment Act in In the last three decades, there have been a number of episodes where unscrupulous lenders were able to take advantage of weak FHA oversight of its lending programs to produce large volumes of inappropriate loans that were highly profitable to them and their associates but injurious to borrowers, communities, and the FHA insurance fund. One recent episode came in the immediate aftermath of the subprime lending meltdown, when many predatory lenders simply moved over and continued plying their trade as FHA lenders. 16 II. THE OVERALL LEVEL AND COMPOSITION OF MORTGAGE LENDING This brief section reports on the current levels of, and recent trends in, the overall volume of mortgage lending and in the shares of total lending accounted for by government-backed loans (GBLs) and high- APR loans (HALs). The findings presented in the bullet points and charts below are based on detailed tables that follow the text of this report. Tables 1 and 2 provide information on total loans, GBLs, and HALs in the City of Boston, in the Greater Boston area, and in Massachusetts; data for total loans and GBLs in the state s thirty-three largest cities and towns are presented in Table 3. For each geographical area, the tables provide information on the number of mortgage loans, the number of GBLs (or HALs), and the percentage of all loans that are GBLs (or HALs); this information is provided separately for homepurchase loans and refinance loans. 14 Researchers at the Federal Reserve have provided a fairly detailed account of these developments and their impact on GBL lending. They show that during the last half of 2009, for borrowers with FICO scores below 700, FHA and VA loans accounted for almost all loans with loan-to-value ratios (LTVs) greater than 80%; for borrowers with FICO scores above 700, FHA and VA loans accounted for about 40% of loans with LTVs between 80% and 90%, for about 80% of loans with LTV's between 90% and 95%, and for about 95% of loans with LTVs above 95%. Robert Avery, et al., The 2009 HMDA Data: The Mortgage Market in a Time of Low Interest Rates and Economic Distress, Federal Reserve Bulletin, December 2010, pp. A54 A61: available at: See also: A Look at the FHA s Evolving Market Shares by Race and Ethnicity, in HUD s U.S. Housing Market Conditions, First Quarter, 2011, pp. 6 12; available at: 15 For good introductions to these periods in the FHA s history see Kenneth T. Jackson, Crabgrass Frontier: The Suburbanization of the United States, Oxford University Press, 1985, pp ; Gregory D. Squires, ed., From Redlining to Reinvestment: Community Responses to Urban Disinvestment, Temple University Press, 1992, pp. 3 7 and ; Beryl Satter, Family Properties: Race, Real Estate, and the Exploitation of Black Urban America, Henry Holt, 2009, pp ; and Calvin Bradford and Anne B. Shlay, Assuming a Can Opener: Economic Theory s Failure to Explain Discrimination in FHA Lending Markets, Cityscape, Vol. 2, Num. 1, pp ( For an account of the B-BURG experience, see Hillel Levine and Lawrence Harmon, The Death of an American Jewish Community: A Tragedy of Good Intentions, Free Press, See Business Week s cover story of November 19, 2008, by Chad Terhune and Robert Berner, FHA-Backed Loans: The New Subprime ; available at: 6

14 The most striking findings that emerge from these tables are the high levels of government-backed lending that have emerged during the last three years and the virtual disappearance of subprime (high- APR) lending. After stabilizing in 2009, the number of homepurchase loans continued to trend downward in Statewide, the 47,669 home-purchase loans in 2010 were 8% fewer than in 2009 and less than one-half the number in The 158,689 refinance loans statewide were also down modestly from the year before, but were more than double the number in 2007 and For the second year in a row, refinance loans accounted for more than three-quarters of total lending. (See Table 1.) Government-backed loans (GBLs) continued to account for historically high shares of total lending in Statewide, GBLs, accounted for nearly one-third (32.2%) of all home-purchase lending and for one-twelfth (7.9%) of the much larger volume of refinance lending. In the City of Boston, GBLs accounted for 22.8% of homepurchase loans and 7.1% of refinance loans; in Greater Boston, the corresponding loan shares were 24.7% and 5.9%. The GBL loans shares are close to those in the previous year, but far above those in 2005, when GBLs accounted for just 1.9% of home-purchase loans and 0.6% of refinance loans statewide (and their loans shares were even smaller in Boston and Greater Boston). (Table 1 and Exhibit 1) High-APR loans (HALs) almost disappeared in 2010, accounting for just 0.5% of all loans (home-purchase and refinance combined) statewide far below their peak level of 22.2% in In 2010, there were just 42 HALs in Boston, 332 in Greater Boston, and 1,066 statewide. (See Table 2 and Exhibit 1.) Government-backed loans accounted for a substantially smaller percentage of loans in Massachusetts than they did nationwide. Overall, the GBL loan shares in 2010 were 13.5% in Massachusetts and 27.0% nationwide. For home-purchase loans, the GBL loan shares were 32.2% in the state and 53.4% nationwide; for refinance loans, they were 7.9% in the state and 14.4% nationwide. 17 Exhibit 1: High-APR and Gov t-backed Loans in Greater Boston, First-Lien Home-Purchase Loans for Owner-Occupied Homes 25% 20% 15% 10% % HALs % Gov t-backed 5% 0% Source: Tables 1 & 2 17 Nationwide GBL shares were calculated from data in Table 7 of Robert B. Avery et al., The 2009 HMDA Data, Federal Reserve Bulletin, 2010 and Table 11 of Robert B. Avery, et al., The Mortgage Market in 2010, Federal Reserve Bulletin, 2011 [forthcoming]. These percentages are for conventional and government-backed first-lien loans on owner-occupied site-built homes. The 2005 nationwide percentage shown in Exhibit 2 was calculated from data in Table 4 of Robert B. Avery, et al., Higher-Priced Home Lending and the 2005 HMDA Data, Federal Reserve Bulletin, All three articles are available at: 7

15 EXHIBIT 2: Overall GBL Loan Shares, 2005, 2009 & % 25% 29.4% 27.0% % 15.0% 15% 11.4% 12.0% 13.5% 10.8% 10.0% 10% 5% 5.3% 0.3% 0.4% 1.1% 0% Boston Greater Boston Mass USA Source: Table 1 and see footnote 17 Among the state s thirty-three biggest cities, 18 GBL loan shares were highest in Lawrence (where they accounted for 78.7% of all home-purchase loans and 30.7% of all refinance loans), Brockton (73.4% and 25.4%) and Springfield (67.1% and 25.2%). GBLs also made up more than half of all homepurchase loans in eight other cities (Lynn, Revere, Fall River, New Bedford, Methuen, Taunton, Attleboro, and Worcester) and the GBL share of refinance loans was also above 20% in three other cities (Fall River, New Bedford, and Chicopee). (Table 3) Almost every city and town in Massachusetts received at least one government-backed loan (GBL) in Of the 287 cities and towns for which the number of GBLs loans can be determined exactly, only four small towns in Berkshire County failed to receive at least one GBL (Florida, Savoy, Monterey, and Tyringham). 19 There were only a few GBLs in the wealthiest communities: Weston, which has the highest median family income (MFI) of any community in the state ($181,041, according to the 2000 Census), received two GBLs; Dover, with the second highest MFI, received three GBLs; and Carlisle, which had the third highest MFI, received six GBLs. (Supplemental Table 5) III. LENDING BY BORROWER RACE/ETHNICITY AND INCOME In all areas of Massachusetts, black and Latino borrowers were much more likely than their white counterparts to receive government-backed loans (GBLs). At the same time, blacks and Latinos received shares of total conventional loans (a term commonly used as equivalent to non-governmentback loans or non-gbls ) that were disproportionately small compared to their shares of total households. The pattern with respect to GBL loans can be seen from two different perspectives. First, GBLs made up much larger shares of all loans to black and Latino borrowers than they did of all loans to white borrowers. Second, blacks and Latinos received much larger shares of total GBLs than they received of total conventional loans. When borrowers are grouped by income level, GBL loan shares tend to 18 Although five of the state s thirty-three largest municipalities, as listed in Table 3, are officially towns, the municipalities will be referred to collectively as cities throughout this report. The five towns are: Arlington, Brookline, Framingham, Plymouth, and Weymouth. The smallest city or town among the biggest thirty-three is Westfield, with a population of 40,072 according to the 2000 Census. 19 In addition, there were three multi-town census tracts where the number of GBLs was smaller than the number of towns; in these census tracts there were between four and eight additional towns that did not receive any GBLs. Of the 351 cities and towns in the state, only 283 are large enough to have at least one census tract entirely to themselves. The other 68 towns share a total of 23 census tracts, with the number of towns that share a single census tract ranging from two to six. Census tracts are the smallest geographical area for which HMDA data are available, so it is impossible to determine which towns received the loans made in these 23 census tracts. 8

16 decrease steadily as income increases. When borrowers are classified by both race and income, substantial black/white and Latino/white disparities exist at every income level. 20 share was 6.9%, but Latino loan shares were 2.6% for conventional home-purchase loans and just 1.3% for conventional refinance loans. (Panel II of Table 4) Black borrowers in Boston, Greater Boston, and statewide received shares of total conventional loans in 2010 that were far below their shares of total households. In Boston, for example, blacks made up 21.1% of households but received only 5.4% of conventional home-purchase loans and 3.4% of conventional refinance loans. Statewide, the black household share was 4.6%, but black loan shares were just 1.9% for prime homepurchase loans and 0.9% for prime refinance loans. 21 (Panel II of Table 4) Latino borrowers in Boston, Greater Boston, and statewide also received shares of total conventional loans in 2010 that were well below their shares of total households. In Boston, for example, Latinos made up 13.6% of households, but received only 3.5% of conventional homepurchase loans and 2.6% of conventional refinance loans. Statewide, the Latino household Black and Latino borrowers in Boston, in Greater Boston, and statewide were much more likely to receive GBLs than were their white or Asian counterparts. For home-purchase loans in Greater Boston, for example, GBLs accounted for 53.8% of loans to blacks and 54.5% of loans to Latinos, but only 23.7% of loans to whites. Accordingly, the black/white disparity ratio and the Latino/white disparity ratio were both 2.3. For refinance loans in Greater Boston in 2010, the GBL loan shares were smaller but the disparity ratios were greater: the GBL loan shares were 21.6% for blacks and 17.1% for Latinos, but only 5.9% for whites, for a black/white disparity ratio of 3.7 and a Latino/white disparity ratio of 2.9. The corresponding disparity ratios in the City of Boston were somewhat higher and those statewide were somewhat lower. GBL loan shares were consistently much lower for Asian borrowers than for whites. (Exhibit 3 & Table 4) EXHIBIT 3: GBL Loan Shares by Race, Greater Boston, % 53.8% 54.5% 50% Home-Purchase Refinance 40% 30% 20% 10% 0% Source: Table % 23.7% 17.1% 11.3% 5.9% 2.6% Black Latino White Asian 20 Appendix Table 3 and the accompanying Chart A-3 update the table and chart from previous Changing Patterns reports that have tracked the number and percentage of all home-purchase loans that have gone to borrowers of different races/ethnicities in the City of Boston since In addition, information on the share of all loans that went to borrowers at various income levels is presented in the bottom half of Table 9, and Appendix Table 4 and Chart A-4 provide data on the number and percentages of all loans that went to borrowers at different income levels in the City of Boston since This information is provided for readers who may be interested; none of it is discussed in the text of this report. 21 The black and Latino household shares in this paragraph and the next are for 2008, calculated using data from the Census Bureau s American Fact Finder ( The black household shares both in Boston and statewide decreased slightly between 2000 and 2008: from 21.4% to 21.1% in Boston and from 4.7% to 4.6% statewide. The Latino household shares both in Boston and statewide increased between 2000 and 2008: from 10.6% to 13.6% in Boston and from 4.9% to 6.9% statewide. Calculations for 2000 were based on data in Tables H9 and H10 of Summary File 3 data. Calculations for 2008 were based on data in Tables B11001, B11001B, and B11001I of American Community Survey 1-year estimates for The method used for these calculations was consistent for the two dates. 9

17 The dramatic racial/ethnic disparities in government-backed mortgage lending can be illuminated from a different perspective by noting that while black homebuyers in Greater Boston received just 2.0% of all conventional loans in 2010, their share of all GBL loans was three and one-half times greater 7.2%. Similarly, while Latino homebuyers received only 2.5% of all conventional loans in Greater Boston, their share of all GBL loans was 9.1%. (Table 4, Panel II) The general patterns of GBL loan shares being substantially higher for black and Latino borrowers than for their white counterparts, and of blacks and Latinos having substantially larger shares of GBLs than of conventional loans, were also present in most of the state s largest cities. Information for the state s thirtythree largest cities is presented in Tables 5 8; also see Exhibit When borrowers in Boston, Greater Boston, and Massachusetts are grouped into five income categories, GBL shares of both home-purchase and refinance loans in 2010 tend to decline steadily as the level of borrower income increases. Statewide, for example, GBL shares of home-purchase loans were 44.3% for moderateincome borrowers, 37.7% for middle-income borrowers, 24.4% for high-income borrowers, and 7.5% for highest-income borrowers. For refinance lending statewide, GBL loan shares fell steadily from 8.1% of moderate-income borrowers to just 1.4% for the highest-income borrowers. 23 (The GBL shares for low-income borrowers were generally lower than those for moderate- and middle-income borrowers; this may reflect the role that targeted affordable mortgage programs play for low-income borrowers.) GBL lending to borrowers at different income levels in each of the state s thirty-three largest cities tended to follow the same general pattern. The median family income in the Boston MSA in 2010 was $89,500, so low-income borrowers there were those with incomes up to $44,000, moderate-income was from $45,000 to $71,000, middle-income was from $72,000 to $107,000, high-income was from $108,000 to $179,000, and highest-income borrowers were EXHIBIT 4: Black and Latino Shares of All Home-Purchase Loans, Ten Biggest Cities in Massachusetts, 2010 Boston Worcester Springfield Lowell Cambridge Brockton New Bedford Fall River Lynn Quincy Black share of total non-gbls GBLs 5.4% 18.4% 5.1% 12.1% 9.4% 18.3% 1.6% 3.2% 2.4% 0.0% 26.3% 41.6% 6.5% 5.2% 0.7% 1.7% 6.7% 7.4% 2.4% 1.9% Latino share of total non-gbls GBLs 3.5% 11.6% 8.3% 12.7% 15.8% 27.7% 3.9% 8.9% 2.6% 9.7% 3.8% 12.0% 3.5% 10.9% 1.4% 1.1% 11.9% 28.8% 1.1% 3.2% Source: Table 6 22 Corresponding data for the state s fourteen counties and for all of its cities and towns is presented in Supplemental Tables 2 3 & It is interesting to note that HMDA data include no information on borrower income for more than one-third of the refinance GBLs in Massachusetts in 2010 see the No Info row in Panel I.B in Table 9. (In contrast, HMDA data include information on borrower income for over 99% both of home-purchase GBLs and of all conventional loans.) This reflects the FHA s streamline refinance program for borrowers refinancing from one FHA loan to another with no cash out; under this program, if a current appraisal shows that the property value is greater than the loan amount and if the borrower has a good payment history, then the lender need not verify or report the borrower s income. 10

18 EXHIBIT 5: GBL Loan Shares by Income, Massachusetts, % 44.3% 40% 38.2% 37.7% Home-Purchase Refinance 30% 24.4% 20% Source: Table 9 10% 0% 6.3% 8.1% 7.0% 7.5% 4.6% 1.4% Low Moderate Middle High Highest those with incomes of $180,000 or more. 24, 25 (Tables 9 & 10 and Exhibit 5) When borrowers are grouped by both race/ethnicity and income level, the GBL loan shares for blacks and Latinos are usually substantially higher than the GBL shares for white borrowers in the same income category. This general pattern holds in Boston (Table 11), in Greater Boston (Table 12), and statewide (Table 13). For brevity, only one specific example will be provided here. In the City of Boston, 48.0% of high-income blacks and 42.3% of high-income Latinos received their homepurchase loans in the form of GBLs, while the GBL loan share was 17.0% for high-income whites. This means that among homebuyers with reported incomes between $108,000 and $179,000 or more, blacks were 2.8 times more likely to receive a GBL than their white counterparts, and Latinos were 2.5 times more likely than whites to receive their mortgage in the form of a GBL. (Tables 11 13) IV. LENDING BY NEIGHBORHOOD RACE/ETHNICITY AND INCOME In this part of the report the focus is on the characteristics of the geographical areas where government-backed loans (GBLs) were made rather than on the characteristics of the borrowers who received such loans. Table 14 (Boston), Table 15 (Greater Boston), and Table 16 (Massachusetts) classify census tracts by both race/ethnicity and income level. 26 These tables provide clear evidence 24 Following standard practice in mortgage lending studies, these income categories are defined in relationship to the median family income (MFI) in the metropolitan area in which the home is located. Standard practice is to divide borrowers into four income categories: less than 50% of the MFI of the metro area is low-income ; between 50% and 80% is moderate-income ; between 80% and 120% is middle-income ; and over 120% is upperincome. In this report, the standard upper-income category for borrowers is subdivided into high-income (between 120% and 200% of the MFI in the relevant metropolitan area) and highest-income (more than double the MFI in the metro area). This report also differs from standard practice in using the MFI of the Boston MSA for all communities in that five-county region. The standard practice for analysis of HMDA data now is based on the division of the Boston MSA into three Metropolitan Divisions (MDs), each with its own MFI. This report deviates from the standard practice because it makes no sense to treat, for example, Cambridge and Boston as being in different metropolitan areas. Note: HMDA data only report borrower income to the nearest thousand dollars. See Notes on Data and Methods for more detailed information on metropolitan areas and MFIs. 25 Information on lending to borrowers at different income levels in the state s fourteen counties is provided in Supplemental Table Census tracts, defined by the U.S. Census Bureau for each decennial census, are the smallest geographic area for which HMDA data are reported. Census tracts typically contain between 3,000 and 6,000 people and, in urban areas, cover an area several blocks square. Boston, with a population of 589,141 according to the 2000 census, has 157 census tracts. Census tracts are placed in racial/ethnic categories on the basis of percentages of minority and white households as reported in the 2000 census (minority households are all those for which the householder is other than a non-latino white). A tract is placed into an income category on the basis of its median family income (MFI) in relationship to the MFI in the Metropolitan Statistical Area (MSA) within which the tract is located. MFIs for geographical areas are from the 2000 decennial census. Low-income tracts are those with MFIs less than 50% of the MFI in the MSA; moderate-income tracts have MFIs from 50% 80% of the MFI in the MSA; middle-income tracts have MFIs from 80% 120% of the MFI in the MSA; and upper-income tracts are those with MFIs greater than 120% of the MFI in their MSA. 11

19 that GBLs are concentrated disproportionately in areas where the percentage of minority residents is high and in areas where income levels are low (often, these are the same areas). The first two bullets illustrate this general pattern by summarizing results for home-purchase lending in Boston and refinance lending statewide. For home-purchase loans in the City of Boston in 2010, the government-backed loan (GBL) share in low-income census tracts was four and one-half times greater than that in upper-income tracts (23.6% vs. 5.2%) and the GBL loan share in predominantly minority tracts (those with more than 75% minority households) was almost three times greater than that in predominantly white tracts (45.6% vs. 16.4%). For tracts in the same income category, the GBL share tends to rise substantially as the percentage of minority households increases. The GBL loan shares were highest in the 61 census tracts where minorities constituted the majority of households (all of which tracts are low- or moderate-income). (Table 14) For refinance loans in the state as a whole, the GBL loan share in low-income census tracts was 4.5 times greater than that in upper-income tracts (19.3% vs. 4.3%) and the GBL loan share in predominantly minority tracts was 3.4 times greater than in predominantly white tracts (26.2% vs. 7.6%). The GBL loan shares are highest in low-income predominantly-minority census tracts. (Table 16) Government-backed lending varied dramatically among Boston s major neighborhoods. For home-purchase loans, GBL shares ranged from 64.2% in Mattapan and 55.7% in East Boston to 2.7% in Back Bay/Beacon Hill. For refinance loans, GBL shares ranged from 26.3% in Mattapan to 0.8% in the South End. The four Boston neighborhoods with the highest percentages of minority residents Mattapan, Roxbury, Dorchester, and Hyde Park were all among the five neighborhoods with the highest GBL shares for both home-purchase and refinance lending. (Table 17 and Exhibit 6) EXHIBIT 6: GBL Shares of Home-Purchase Loans, Boston Neighborhoods, % 64.2% 60% 50% 55.7% 50.8% 40% 30% 34.2% 34.0% 29.7% 22.1% 21.9% 20% 15.5% 15.2% 14.8% 11.7% 8.5% 7.9% 10% 2.7% 0% Mattapan East Boston Source: Table 17 Hyde Park Roxbury Dorchester Roslindale South Boston West Roxbury Jamaica Plain Fenway/Kenmore Charlestown Allston/Brighton South End Central Back Bay/BeaconHill 12

20 The same pattern emerges at the level of entire communities. For the 33 biggest cities in Massachusetts, Table 3 provides information on median family income and percentages of black and of Latino households as well as on government-backed lending. Examination of these data shows that GBL loan shares have a strong positive correlation with communities percentages of black and Latino residents and a strong negative correlation with communities median family incomes (MFIs). For example, the three cities with the highest GBL shares for home-purchase loans in 2010 had an average of 39.0% black plus Latino households and an average MFI of $38,110, while the four cities with the lowest GBL shares had an average of 5.1% black plus Latino households and an average MFI of $85,902. (The high GBL-share cities are Lawrence, Brockton, and Springfield; the low GBL-share cities are Cambridge, Brookline, and Newton.) Total home-purchase lending to blacks and Latinos was highly concentrated in a small number of the state s cities and towns, and entirely absent in many others. Just four cities (Boston, Brockton, Springfield, and Worcester) accounted for over one-half (50.3%) of total loans to blacks in Massachusetts; these same four communities accounted for only 10.7% of the state s total loans to whites. Eight communities (Lawrence, Boston, Springfield, Lynn, Revere, Worcester, Chelsea, and Methuen) accounted for over one-half (52.2%) of all lending to Latinos in the state, while accounting for just 12.4% of total lending to whites. At the same time, blacks received no home-purchase loans in 196 of the state s 351 cities and towns, and only a single loan in 58 more, while there were 142 communities where Latinos received no loans and 70 more where they received just one. In 123 communities, over one-third (34.0%) of the state s cities and towns, there was not a single home-purchase loan to either a black or a Latino homebuyer. (Calculated from data in Supplemental Table 6) V. DENIALS OF MORTGAGE LOAN APPLICATIONS HMDA data include information not just on mortgage loans made, but also on all applications for mortgage loans, thereby making it possible to examine patterns of loan denials. The findings presented in this section are based on information presented in Tables 18 and 19 for Boston, Greater Boston, and Massachusetts. Information on applications and denial rates for Asians, blacks, Latinos, and whites in every city and town in Massachusetts is presented in Supplemental Table , 28 In Boston, Greater Boston, and Massachusetts in 2010, the denial rates on conventional (i.e., nongovernment-backed) mortgage loan applications by blacks both for homepurchase loans and for refinance loans were in every case more than twice as high as the corresponding denial rates for whites, while denial rates for Latinos were more than one and one-half times as high as the white denial rates. The black/white disparity ratios ranged from 2.01 to 2.32, while the Latino/white disparity ratios ranged from 1.55 to Asian denial rates for applications for conventional home-purchase loans were modestly higher than those for whites; for conventional refinance loans, they were close to those for whites. (Table 18 and Exhibit 7) 27 In addition, Appendix Table 5 updates the table from earlier reports that provided information on overall denial rates and on denial rate disparity ratios in Boston, Massachusetts, and the U.S. since It shows that denial rates in 2010 fell modestly for Asians and blacks in Boston, for blacks in Massachusetts, and for all groups nationwide (all other denial rates were relatively unchanged). Black/white denial rate ratios in 2010 ranged from 2.01 in Boston to 2.51 nationwide, while Latino/white denial rate ratios ranged from 1.95 nationwide to 2.20 in Massachusetts. 28 Not all loan applications result in either loans or denials; approximately one-sixth of applications have other outcomes. Appendix Table 6 provides information on the percentage distribution of loan applications among the five possible results of a mortgage application that are reported in HMDA data (loan originated, loan approved by lender but declined by applicant, application denied, application withdrawn, and file closed for incompleteness). Data are provided for Boston, Greater Boston, and Massachusetts, separately for home-purchase and refinance loans. 13

21 EXHIBIT 7: Denial Rates, by Race/Ethnicity, Conventional Mortgage Loan Applications, Greater Boston, % 25% 20% 20.9% 17.4% 25.3% 19.5% Asian Black Latino White 15% 10% 11.6% 9.0% 11.1% 10.9% 5% 0% Home-Purchase Refinance Source: Table 18 Although denial rates were higher for government-backed loans (GBLs) than they were for conventional loans, black/white and Latino/white denial rate disparity ratios for GBLs were considerably lower. These GBL denial rate disparity ratios, for both homepurchase and refinance lending, all fell in the relatively narrow range of 1.21 to Asian/white denial rate disparity ratios for GBLs were generally lower than the black/white and Latino/white ratios, but tended to be higher than the Asian/white disparity rate ratios for conventional loans. (Table 18) Even though black and Latino applicants had, on average, substantially lower incomes than their white counterparts, 29 the higher denial rates experienced by blacks and Latinos cannot be explained by their lower incomes. When applicants in Boston, in Greater Boston, and statewide are grouped into income categories, the 2010 denial rates for blacks and for Latinos were in almost every case well above the denial rates for white applicants in the same income category, and there is no tendency for the denial rate disparity ratio to fall as income rises. For example, in the state as a whole, black applicants with incomes over $150,000 experienced a denial rate of 14.3%, more than twice as high as the 6.7% denial rate experienced by their white counterparts; the 11.8% denial rate for Latinos in this income category was 1.8 times the white rate. (Table 19 and Exhibit 8) Appendix Tables 7 and 8 provide summary information on the stated reasons for loan denials to black, Latino, and white applicants for homepurchase and refinance loans, respectively, both overall and for two broad income groupings. The stated reasons for loan denials are quite similar for blacks, Latinos, and whites, but differ substantially by the income level of applicants and between home-purchase and refinance applications. Overall, Debt-to-Income Ratio is the most frequently stated reason for homepurchase loan denials, with Collateral second, while these positions are reversed for refinance denials. Credit History is the third most frequently cited reason for both types of loans. Debt-to-Income Ratio is substantially more important and Collateral is less important for low- and moderate-income applicants than for those with higher incomes. 29 For example, it can be calculated from the data in Table 19 that 61% of white applicants in Greater Boston had reported incomes of $91,000 or greater, compared to only 26% of black applicants and 30% of Latino applicants. 14

22 EXHIBIT 8: Denial Rates by Race & Income, Non-GBL Home-Purchase Loans, Greater Boston, % 35% 30% 25% Denial Rate 20% 15% 10% 5% 0% Black Latino White Source: Table over 150 Applicant Income ($000s) VI. LENDING BY MAJOR TYPE OF LENDER The analysis in this section is based on classifying each mortgage lender into one of three major categories. Massachusetts banks and credit unions consist of all banks headquartered in Massachusetts or with branches in the state, plus Massachusettschartered credit unions, plus most mortgage lending affiliates of these institutions. Licensed Mortgage Lenders consist of lenders who require a license from the state s Division of Banks in order to make mortgage loans in the state; these are primarily independent mortgage companies, but also include some subsidiaries and affiliates of non- Massachusetts banks. (Beginning in 2010, this category is limited to lenders that made at least fifty mortgage loans in Massachusetts during the year; in earlier years it includes all licensed lenders.) Other Lenders consist of all other lenders, primarily of outof-state banks and credit unions, plus federallychartered Massachusetts credit unions. 30 This three-way classification was adopted for the Changing Patterns series of reports to emphasize one crucial factor whether a lender s Massachusetts mortgage lending (1) is covered by the state and/or federal Community Reinvestment Act (CRA); (2) is subject to similar oversight by the state (until recently, this oversight was potential; now it is actual, as explained in the following paragraph); or (3) is exempt from such state oversight. This classification has proved useful in identifying dramatically different patterns of mortgage lending by lenders subject to evaluation under the CRA and by those not subject to such evaluation. Recognition of these different lending patterns was an important factor in the inclusion of CRA-type obligations and evaluations for licensed mortgage lenders (LMLs) in the 2007 Act Protecting and Preserving Homeownership that were implemented in the Division of Bank s Mortgage Lender Community Investment (MLCI) regulation that became effective in September The regulation applies to licensed mortgage lenders that made at least fifty mortgage loans in the state during the preceding year. 30 Federal credit unions based in Massachusetts are included in the other lenders category because they are not subject to either the federal or state CRA. 15

23 Following four years of substantial increases, the home-purchase loan share of Massachusetts banks and credit unions fell slightly in 2010, to 45.3% in Boston (down from 47.5% the year before but still more than double the low point of 19.7% in 2005) and to 43.7% statewide (down from 45.1% the year before but far above their 23.6% loan share in 2005). Table 20 shows how the shares of major categories of mortgage lenders have changed since 1990, following the same format and the same lender categories as the corresponding table in previous reports. For this table only, Licensed Mortgage Lenders and Other Lenders are combined into Mortgage Companies and Out-of-State Banks. 31 Massachusetts banks and credit unions accounted for a substantially larger share of total (home-purchase plus refinance) loans than of government-backed loans (GBLs), while the reverse was true for Licensed Mortgage Lenders. Statewide, Massachusetts banks and credit unions accounted for 43.5% of all loans but only 20.9% of GBLs, while LMLs accounted for onethird (33.2%) of all loans, but for one-half (48.2%) of GBLs. Other Lenders accounted for 23.3% of total lending and 30.9% of GBLs. The same general pattern was true in the City of Boston and in Greater Boston. (Table 21 and Exhibit 9) EXHIBIT 9: Market Shares of Major Lender Types, Greater Boston, % 49.0% All Loans GBLs 40% 40.2% 37.7% 30% 20% 20.5% 22.1% 30.6% 10% 0% Mass Banks LMLs Others Source: Table 21 GBLs made up a much larger share of total loans by LMLs and Other Lenders than of total loans by Massachusetts banks and credit unions. Statewide, for example, GBLs accounted for 19.7% of all loans by LMLs, and for 18.0% of all loans by Other Lenders, but for only 6.5% of all loans by Massachusetts banks and credit unions. Again, the same general pattern was true in the City of Boston and in Greater Boston. (Table 22) Table 23 (Boston) and Table 24 (Massachusetts) present information on the shares of the total loans of each of the three major types of lenders that consisted of conventional loans (that is, non-government-backed loans) to traditionally underserved borrowers and neighborhoods, and on the shares of their total loans that consisted of GBLs to these same borrowers and neighborhoods. Massachusetts banks and credit 31 For Boston only, the Big Boston Banks are separated out from other Massachusetts banks and credit unions to document how the formerly dominant market share of this group has diminished. In 2010, the biggest Boston banks consisted of Bank of America, RBS Citizens, and Sovereign. Notes on Data and Methods provides information on the banks included in the Big Boston Bank category in earlier years and on how the category of subprime lenders was defined for the years